Pensions - Articles - Stochastic projections address the FSA’s advice

 eValue FE responds the FSA's policy statements on pension transfer value analysis assumptions -
 As a result of the FSA’s latest guidance, advice relating to enhanced transfers now needs to contain information about the uncertainty of proposed DC benefits and the extent to which these may fall short of existing DB benefits.

 Product Director, Mark Grimes said, “Continued use of deterministic projections inadequately communicates the uncertainty and risks associated with transferring from a DB to a DC scheme. Communicating the link between the member’s attitude to investment risk and the investment options used to illustrate the relative outcomes is key to helping members make informed decisions about the relative merits of an enhanced transfer value (ETV) offer. Stochastic projections will enable pension plan members considering transfer value offers to understand the risks they are taking on if they forgo their DB entitlements.”

 eValue FE supports the changes that the FSA is making to the assumptions used and understands that the somewhat cautious stance adopted arises from the inadequacies of the current approach which often involves an undue focus on critical yields rather than the risk that is being transferred from employer to employee in an ETV offer.

 On the basis of the FSA’s policy statement, eValue FE’s believes that stochastic modelling is set to play an increasingly vital role in enhanced transfer value (ETV) exercises and that it needs to lie at the heart of advisory processes and member communications.